The practice of government using tax dollars to lobby other governments appears to often be a lose-lose proposition for taxpayers. In many cases, if the lobbying succeeds, government expands; if it fails, government wastes tax dollars. The authors hope that this paper and the disclosure of existing contracts will subject taxpayer-funded lobbying to greater scrutiny, transparency, and accountability in Missouri.

Related Links

Commentary: “Missouri’s Taxpayers Lobbying To Pay More Taxes?” by Mary Kate Hopkins

Public Documents: Missouri State and Local government lobbying contracts, searchable

The post Taxpayer-Funded Lobbying: Government Lobbying Government appeared first on Show-Me Institute.

The department’s Joseph Eddy says it costs $44.68 a day per inmate. He says $12.14 a day is for medical and mental health services. Another $2.54 pays for three meals a day.

Prisoners also are paid for their work—7-dollars-50 cents a month. If they have their GED, they can earn an extra dollar. That’s about 35 cents a day.

Eddy says the direct costs of each inmate every day is $16.39 a day. The other $28 go for the administrative and prison personnel, utilities, and other costs that go with running a prison.

Per my calculations, that amounts to $16,308.20 per year, which is 26 percent smaller than the federal poverty line of $22,050 — and less than I would have expected. A quick search of the per-inmate expenditures in peer states suggests that Missouri ranks toward the bottom in its per-inmate expenditures.

It is interesting that the direct costs of each inmate amount to only 37 percent of the total cost per each inmate. Even more interesting is that medical care represents a full 74 percent of the direct costs of each inmate. To me, all of this suggests that there is actually not a lot of fat that can or will be trimmed, and that those looking to prioritize significant savings would do well to look elsewhere. That being said, there may still be ways for the state corrections department to operate more efficiently. In a subsequent post, I’ll discuss how Missouri can create markets and design incentives in ways that can save it some of the money it currently spends on corrections.

The post Cost of a Missouri Inmate appeared first on Show-Me Institute.

Countries where more people choose to invest in private schools may have other attributes, such as higher income levels or a greater commitment to education, that lead to better achievement. If this is the case, any positive correlation between private schooling and student achievement could reflect a country’s income or educational commitment rather than any beneficial effects of competition. Or it may be the case that low-quality public schools increase the demand for private schooling. If so, then it could seem that competition lowered public school quality when in fact the causal connection could be in the opposite direction.

To solve for this, West and Woessmann exploit a technique that economists call an instrumental variables approach. Essentially, they found a new variable — the size of a country’s Catholic population in 1900 — which is a useful predictor for the current share of schools that are private. Because the new variable is a good predictor of the variable they are really interested in (share of schools that are private), but is presumably not influenced by higher income levels or greater commitment to education, using this new variable is more useful for determining causality.

Their results (emphasis added):

Our results indicate that the share of schools that are privately operated has an economically and statistically significant positive effect on student achievement in mathematics, science, and reading, even after controlling for the current levels of Catholics and for the share of funding that privately operated schools receive from the government. Larger historical Catholic shares that translate into a ten percentage point larger private school sector today increase average student achievement on the math test by 9% of an international standard deviation. Science and reading achievement increase by roughly 5% of a standard deviation. These patterns are evident despite the fact that the contemporary share of Catholics in each country is negatively related to student achievement, suggesting that distinctive cultural features of traditionally Catholic countries are unlikely to be driving these results. Importantly, much of the positive effect of private school shares accrues to students in public schools, suggesting that the overall effect is not simply due to privately operated schools being more effective, but rather it reflects benefits of competition.

It’s not clear how applicable these results are to private school competition within only the United States or within individual states such as Missouri. However, if the same pattern holds for educational institutions in Missouri, then policies that encourage private school competition, like vouchers or tuition tax credits, will have spillover benefits for public school students as well — not just the recipients of educational aid.

By the way, those readers who are now beginning to suspect that I spend most of my free time perusing the economics of education literature would be correct in that suspicion.

The post Externalities of Private School Competition appeared first on Show-Me Institute.

Do students benefit by using the Milwaukee Parental Choice Program (MPCP) to attend a private school instead of a Milwaukee Public Schools (MPS) school? In addressing that question, most prior evaluations focus on whether students in the MPCP score better on tests of academic achievement than students in MPS schools. As reviewed in our 2007 report, two studies based on randomized trials each demonstrated significantly higher mathematics test scores for MPCP students as compared to MPS students four years after enrolling in the program; one study also showed significantly higher reading test scores.

In contrast, the focus of the present study was to investigate the effect of the voucher program on graduation rates:

Overall, had MPS graduation rates equaled those for MPCP students in the classes of 2003 through 2009, the number of MPS graduates would have been about 18 percent higher. That higher rate would have resulted in 3,939 more MPS graduates during the 2003-2009 years. A recent analysis of the economic impact of high school dropouts suggests that the annual impact from an additional 3,939 MPS graduates would include an additional $24.9 million in personal income and about $4.2 million in extra tax revenue.

An important consideration to bear in mind when reviewing education research is that educational goals are varied, and a wide variety of educational outcomes can be implicated by policy changes. As such, even if a policy change is demonstrated to have a negligent impact on an important student outcome such as test scores, that policy may still positively impact other desirable student outcomes. In the case of the voucher program in Milwaukee, it appears that several student outcomes are positively implicated by school choice. In other regions of the country, school choice programs have had a much less significant impact on test scores. It is important that researchers and the general public then probe the effects of such programs on other desirable outcomes, as well, before a summary judgment of the policy is made.

The post School Choice and Graduation Rates appeared first on Show-Me Institute.

Policymakers and academics are increasingly interested in applying financial incentives to individuals in education. This paper presents evidence from a pay for performance program taking place in Coshocton, Ohio. Since 2004, Coshocton has provided cash payments to students in grades three through six for successful completion of their standardized testing. Coshocton determined eligibility for the program using randomization, and using this randomization, this paper identifies the effects of the program on students’ academic behavior. We find that math scores improved about 0.15 standard deviations but that reading, social science, and science test scores did not improve.

The Coshocton program is funded with money contributed by a local businessman.

Although 0.15 standard deviations may seem small, it’s not bad compared to other educational interventions. In terms of improvement per dollar spent, this program seems more efficient than other more popular interventions, like lowering class sizes.

The post I Wish They Paid Me for Grades Here appeared first on Show-Me Institute.

One particular member of the commission (I do not remember which one) attacked a previous speaker who had recommended that all tax credits be abolished. The commission member suggested that since every other state uses tax credits, Missouri’s exit from the business of providing tax credits would put us at such a disadvantage that could result in Missouri no longer producing anything. There are many possible responses to this complaint that tax credit opponents can employ; for brevity, I will note just one.

Comparative Advantage:

Consider two states: Missouri and California. Suppose that these two states have firms that can produce two goods: wine and computers. Now, suppose that firms in Missouri can produce six bottles of wine or three computers per hour, whereas firms in California can produce 12 bottles of wine and four computers per hour. In this case, California firms have a higher productivity and we would say that California has an absolute advantage in the production of both wine and computers. This does not, however, imply that California will, or should, produce both goods.

One of the key insights from introductory economics courses is that comparative advantage matters. Instead of evaluating productivity in terms of outputs, we can evaluate productivity in terms of opportunity cost. Note that, in this example, when a Missouri firm produces one bottle of wine, it misses an opportunity to produce half of a computer. Similarly, when a Missouri firm produces one computer, it misses an opportunity to produce two bottles of wine. We can think of these missed opportunities as costs. For California firms, the cost of producing one bottle of wine is a third of a computer, and the cost of producing one computer is three bottles of wine. So, our example shows that even when California has an absolute advantage in the production of both goods, Missouri still retains a comparative advantage in the production of computers because its opportunity cost (two bottles of wine) is lower than the opportunity cost for California firms (three bottles of wine). Thus, in this limited illustration, it would be more efficient for Missouri to produce computers and trade with California for wine.

We can apply this insight to tax credits. Suppose that California aggressively courts winemakers and computer manufacturers with tax incentives and Missouri does not. One way to think about these incentives is that they work to lower the marginal costs that firms face, which allows a firm to produce more. This makes it appear as though California firms are more productive in translating inputs (in dollars) into outputs (in product volume). As our example illustrates, even if these apparent increases in productivity give Californian firms an absolute advantage in the production of certain goods, it is likely that Missouri will still retain comparative advantage and will continue to produce many of the goods that California chooses to subsidize.

The post Paging David Ricardo appeared first on Show-Me Institute.

Here’s the abstract:

In Project STAR, 11,571 students in Tennessee and their teachers were randomly assigned to different classrooms within their schools from kindergarten to third grade. This paper evaluates the long-term impacts of STAR using administrative records. We obtain five results. First, kindergarten test scores are highly correlated with outcomes such as earnings at age 27, college attendance, home ownership, and retirement savings. Second, students in small classes are significantly more likely to attend college, attend a higher-ranked college, and perform better on a variety of other outcomes. Class size does not have a significant effect on earnings at age 27, but this effect is imprecisely estimated. Third, students who had a more experienced teacher in kindergarten have higher earnings. Fourth, an analysis of variance reveals significant kindergarten class effects on earnings. Higher kindergarten class quality – as measured by classmates’ end-of-class test scores – increases earnings, college attendance rates, and other outcomes. Finally, the effects of kindergarten class quality fade out on test scores in later grades but gains in non-cognitive measures persist. We conclude that early childhood education has substantial long-term impacts, potentially through non-cognitive channels. Our analysis suggests that improving the quality of schools in disadvantaged areas may reduce poverty and raise earnings and tax revenue in the long run.

For those who don’t want to read the whole paper, the research is also available as a PDF of Power Point slides.

The post Importance of Quality in Primary Education appeared first on Show-Me Institute.

While the Chicago Outfit may have been a bit heavy-handed in its debt-collection practices, the interest rate the crew charged for a loan was a bargain. A bargain, that is, compared to the fees charged by the numerous payday loan outfits in Sacramento and throughout the state.

Carlisi and company extended short-term credit, or “juice loans,” for fees that pencil out to an annual interest rate of 260 percent. The Outfit may be disappointed to learn that they were working for chump change. Had they waited a few years, and then come out West, they could have become payday lenders and made some real money.

Although the gratification of physically collecting a loan isn’t allowed, in California it’s perfectly legal for a state licensed payday lender to charge up to 5,474 percent annual interest in this rapidly expanding niche lending business.

I’ve been meaning to comment on this for a while, because this is really fascinating data. Readers who peruse the article from which this excerpt is lifted will note that the author uses this statistic to argue that payday rates are excessive and exploitative. Well, perhaps, but this data doesn’t render that claim obvious. The fact that payday loan rates are higher than loan shark rates could simply suggest either that payday lenders face higher costs of enforcement, higher default rates, higher transaction costs, lower-quality information, or some combination of these factors.

It’s easy to see how a legitimate, white-market business would have higher overhead costs than a black market loan scheme, if for no other reason than that a white-market business must handle contractual disputes with tools furnished by the legal environment. No such encumbrances burden black market creditors. As former Show-Me Institute Policy Analyst Justin Hauke put it in an op-ed: “At least with a payday lender, default is settled in court. In the black market, it usually involves a crowbar.” In this sense, the higher prices of payday loans likely reflect the premium that consumers are willing to pay for safety.

The post Payday Loans vs. Loan Sharks appeared first on Show-Me Institute.

Offering middle-school math teachers bonuses up to $15,000 did not produce gains in student test scores, Vanderbilt University researchers reported Tuesday in what they said was the first scientifically rigorous test of merit pay.

Some 296 middle-school math teachers — two-thirds of the district’s middle-school math teachers — volunteered to participate in the experiment. Half were placed randomly in a control group, while the rest were eligible for bonuses of $5,000, $10,000 or $15,000 if their pupils scored significantly higher than expected on the statewide exam known as the Tennessee Comprehensive Assessment Program.

Except for some temporary gains for fifth-graders, though, their students progressed no faster than those in classes taught by the 146 other teachers.

The PDF for the study is available online.

As a merit pay advocate, I’d love to disparage these results as the product of some unsound methodology, but I can’t, in good faith, do that. This seems like a relatively clean experiment. Yet merit pay supporters need not abandon their cause. The study provides good answers, but the questions may be too narrow to be fully relevant. For example, in evaluating the responsiveness of teachers to potential performance bonuses, the study approximates what a labor economist would call elasticity of effort but not elasticity of labor supply. Put differently, the study suggests that the performance of existing teachers may not change in the presence of performance incentives but the study does not consider the dynamic changes in the overall teaching pool that may result from implementation of merit pay programs. More research must be conducted to evaluate whether merit pay attracts a better pool of educators who, in turn, have positive impacts on student performance.

The post Does Merit Pay Get a Passing Grade? appeared first on Show-Me Institute.

First, although it is true that Paideia’s test scores rank among the lowest in the state, absolute measures of test scores are not a very meaningful measure of school quality. The production of education is similar to the production of anything else in the economy: Poorer quality inputs, in the form of poorer students from historically disadvantaged ethnic backgrounds, translate to poorer quality outputs, in the form of test scores. It’s not only a mistake, then, to compare Paideia’s students to those of high-performing districts, but also to an arbitrary benchmark determined by the state. Taking a snapshot of test scores is not enough, because a reliance on mere glimpses into time discourages an understanding of the underlying trends at work. The more important measure is the longitudinal one: Are Paideia’s students learning more now than they were before the school existed? Perhaps the answer is no, but it doesn’t look like this question was considered by either the Board of Education or the Cole County Circuit Judge.

Second, I am willing to believe that we may overvalue test score measures of all kinds. One-size-fits-all models don’t work in schools, where abilities and interests vary greatly between student populations. Schools that produce less significant test score gains but more significant “creativity” gains may still be cultivating meaningful human capital.

The post Snapshots Vs. Trends in School Testing appeared first on Show-Me Institute.

For starters, basic economic intuition would suggest that the payday lenders operate in a competitive marketplace. Fairly low barriers to entry (both legal and financial) into the market and the vast number of storefronts implies that individual stores face strong incentives to underprice their competitors. The result, barring collusion or market distortion, would be that prices are efficient, and not exorbitant.

The empirical evidence bears out this claim. A paper released by the FDIC Center for Financial Research used panel data from a large vendor to demonstrate that, despite the high interest rates on payday loans, the profitability of payday lenders does not statistically differ from the profitably of other financial intermediaries, like “reputable” banks. This should appeal to intuition: Payday lenders cater to risky populations that are vulnerable to financial stressors and prone to defaults. Risky customers warrant high rates to compensate for high default rates. This understanding regarding the level of market competitiveness and the condition of interest rate efficiency is crucial to understanding the policy effects of regulation in the payday loan market.

Last week, in a conversation with state Sen. Mary Still — one of Missouri’s most vocal critics of the payday lending industry and author of regulatory legislation in the General Assembly — I hoped to identify her latitude of acceptance for various payday lending policies (including deregulating the market further). I discovered that the two policy tools that are most likely to hear debate in the General Assembly are interest rate caps and providing incentives for banks to become “legitimate” vendors of payday loans. In some important ways, these approaches are troubling. If the market is already competitive and interest rates are efficient, an interest rate cap will choke the market and force lenders out — and banks shouldn’t have the ability to offer significantly cheaper rates on similar products. At any rate, revealed preferences would suggest that there is a reason banks aren’t willing to offer payday loans without incentives.

As I’ve discussed earlier, payday loans have the potential to be both helpful and harmful. Imposing interest rate caps on the market will stifle the ability of payday loans to help consumers, and incentivizing banks to offer such loans will do little to shield consumers from harm.

The post Payday Policymaking appeared first on Show-Me Institute.

Meanwhile, the General Assembly, through House Bill 1812 and Senate Bill 784, is focused on reform of the Access Missouri grant. Currently, Access Missouri is structured to award a maximum of $1,000 in aid to students enrolled in two-year Missouri public schools, $2,150 to students at four-year public schools, and $4,600 for students attending Missouri's private colleges and universities. The bills in consideration would equalize these aid amounts to a maximum of $2,850 for all students, across all participating schools.

Choking the channels of aid to private school students while continuing to lavish aid on public school students only exacerbates the inequality and inefficiency that is characteristic of how the state currently supports its students. The current level of funds that the state awards to public school students already dwarfs the pool of funds directed toward private school students. In 2009, the General Assembly appropriated roughly $808 billion for four-year public higher education institutions. This amounts to an average per-student subsidy of approximately $7,280.

On top of this, qualifying public school students enjoyed an additional $56 million of publicly funded scholarships. Meanwhile, private school students received no per-student subsidies and shared a slightly smaller total of $52 million in public scholarship funds. Those who argue in favor of equalizing Access Missouri funds are misguided when they consider only Access Missouri and ignore the state's larger funding apparatus. Put simply, moving toward greater equality in Access Missouri is also a move toward greater inequality in total state support. There is, and always has been, a large disparity of public aid distributed between public and private students. Both reform proposals increase the size of this wedge. It is imperative, then, to consider whether this wedge is justified.

In 2008, Missouri's Coordinating Board for Higher Education adopted a set of basic values to guide higher education policy in the state. First among the list of values, the board recognized that the system is focused on students, learning, and each individual's realization of his or her full educational potential. The proposed reforms to higher education funding fail to do this vision justice.

First, the reforms do not support the full realization of student potential because they fail to honor the individual interests, skills, and needs of Missouri's diverse student population. For example, no public institutions in Missouri offer a complete architectural studies program, so students with an interest in architecture must turn to private institutions. On the margin, students unable to finance a private school education without assistance will necessarily settle for public-institution programs to which they are comparatively less suited.

Second, the proposed reforms pervert the vision of a higher education funding apparatus as centered on students. Instead, the reforms elevate the importance of institutions and suggest that students who attend public institutions are somehow more deserving of the taxpayer dime than students attending private colleges and universities. This is especially disturbing when considering that students attending private institutions contribute along with their parents funds to the pool of tax dollars that finance Missouri's support for higher education. The reform bills in the legislature would only serve to more unevenly distribute the resources of this pool. Meanwhile, Nixon's proposal would restrict private students access to the pool entirely.

The governor has said, In times like these, we simply can't continue to subsidize the choice to attend a private school.” This seems to suggest that the institutional choices that students make should be more relevant to the amount of aid they receive than their income, ability, or interest. This view fails to recognize that it is precisely in times like these that Missouri cannot afford to abandon its principles, or its investments in higher education students regardless of the institutions they choose.

Abhi Sivasailam is an intern with the Show-Me Institute and an economics student at the University of Missouri Columbia.

The post Scholarship Cuts for Private University Students Favor Institutions, not Students appeared first on Show-Me Institute.

Good bit:

The FDIC found that payday loan fees were justified by the costs and risks associated with offering such loans. The FDIC also found competitive products like bounced checks carrying APRs of up to 3,500 percent.That APR calculation – designed to compare competing, long-term forms of credit – is why a 36 percent APR cap, as proposed in current Missouri legislation, would ban short- term loans in the state.

If imposed, a 36 percent rate cap would mean lenders could only charge about $1.38 per $100 borrowed. At such a low rate, lenders simply can’t cover their costs – such as rent, employee salaries and benefits.

As I’ve written before, I’m opposed to payday loan regulation because:

1. I view payday loan transactions as legitimate, consensual business interactions between relatively rational actors.
2. The empirical evidence suggests that payday loans constitute a useful service. I look, for example, to Donald Morgan and Michael Strain, who show that increased access to payday loans reduces the volume of bounced checks. I also look to Edward Lawrence and Gregory Elliehausen, who find that payday loans “satisfy a real financial need within a certain segment of the population.” As I cite these authors, I’m fully willing to concede that there is literature out there that disagrees with their claims. The reading list I composed earlier lists some of those papers. In a future blog post, I will attempt a more detailed comparison of the methodologies employed in the different studies.
3. If payday loans are useful, then limiting or eliminating the payday loan market will drive consumers to underground or black markets. This is not favorable, for reasons that should be self-evident.
4. I think the most legitimate critique of payday loans is that it disadvantages the politically weak who have, for example, little access to legal recourse. If that’s the case, the better solution would be to reform the political/legal apparatus, rather than the payday loan market. Opponents can argue that this is less feasible, and they would be correct, but if the market is driven underground, then these people would have no legal recourse anyway.

My main concern now is the third. Those who seek to regulate payday loans toe a narrow line between tempering the market and hobbling it. Unfortunately, it looks as though the proposed reforms are poised to do the latter.

The post Will Payday Loan Regulations Kill the Market? appeared first on Show-Me Institute.

1. Payday Holiday: How Households Fare after Payday Credit Bans (ungated), Donald P. Morgan and Michael R. Strain.

   “Compared with households in states where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending.”

2. The Economics of Payday Lending (ungated), John P. Caskey, Swarthmore College.

   General overview of payday lending industry and basic issues. Written for a lay audience.

3. Do Payday Loans Cause Bankruptcy? (ungated), Paige Marta Skiba and Jeremy Tobacman.

   “Though the size of the typical payday loan is only $300, we find that loan approval for first-time applicants increases the two-year Chapter 13 bankruptcy filing rate by 2.48 percentage points.”

4. Factors Affecting the Location of Payday Lending and Traditional Banking Services in North Carolina (ungated), Mark L. Burkey and Scott P. Simkins.

   Explores the geography of payday loan institutions. “A key finding is that after controlling for many covariates, race is still a powerful predictor of the locations of both banks and payday lenders.”

5. The Profitability of Payday Loans (ungated), Paige Marta Skiba and Jeremy Tobacman.

   “Despite charging effective annualized rates of many thousand percent, we find lenders’ firm-level returns differ little from typical financial returns. The data are consistent with an interpretation that payday lenders face high per-loan and per-store fixed costs in a competitive market.”

6. Quantifying the Economic Cost of Predatory Payday Lending (ungated), Keith Ernst, John Farris, Uriah King:

   “Our analysis of quantitative data reveals that payday lenders collect the vast majority of their fees from borrowers trapped in a cycle of repeated transactions, where borrowers are forced to pay high fees every two weeks just to keep an existing loan outstanding that they cannot afford to pay off.”

7. A Comparative Analysis of Payday Loan Customers (gated), Edward C. Lawrence and Gregory Elliehausen.

   “By analyzing the data collected in a national survey of payday customers, this research allows policymakers to better understand what type of consumer borrows from payday lenders, for what purpose, and what the true benefits and costs are. The results confirm a strong demand for payday loans that satisfy a real financial need within a certain segment of the population.”

8. Mayday Payday: Can Corporate Social Responsibility Save Payday Lenders (ungated), Carmen M. Butler and Niloufar A. Park.

   “In this article we ask what the best ways are to maximize the wealth of the payday lending industry while limiting the industry’s harmful impact on consumer communities? We assert that payday lenders will likely demonstrate greater corporate social responsibility only after there is a change in the laws that govern the industry coupled with industry-wide reform in corporate governance.”

9. Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap (ungated), Jon Zinman.

   “Borrowing fell in Oregon [after interest rate caps] relative to Washington, with former payday borrowers shifting partially into plausibly inferior substitutes: bank overdrafts and late bill payment. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of Oregon households. Overall the results are consistent with restricted access harming, not helping, consumers on average.”

10. Consumers’ Use of High-Price Credit Products: Do They Know What They Are Doing? (gated), Gregory Elliehausen:

    This paper asserts that consumers of payday loans are sufficiently rational. A caveat, however, is that rationality is a just a process and does not imply that “good” decisions are made.

Some op-eds include:

• In Defense of Usury (gated), by Dean Karlan and Jonathan Zinman
• Congress Takes Aim at Payday Loans (ungated), by Robert DeYoung
• Payday Loan Reform Bad for Borrowers (ungated), by Justin Hauke

The last of those op-eds was written by a former employee of the Show-Me Institute. Perhaps unsurprisingly, my views on payday loans are fairly similar to his. Taking an economic view, I’m concerned that regulatory reform will be unable to limit payday loan harms effectively without driving the market underground. Taking a political view, I view payday loan consumers as sufficiently rational and believe that a government (at least in this arena) has more of an imperative to maintain free, private contracts than to protect the politically weak.

The post Payday Loan Reading List appeared first on Show-Me Institute.

Proponents of reform have made three, general arguments, all of them dubious:

First, they assert that reform would make the distribution of public aid more equitable. It’s atrocious that private school students may receive more than $2,000 in additional funding than their public school counterparts. This is tantamount to pandering to special interests. This argument is very puzzling; do its exponents not remember that the award amounts were carefully derived from two years of collaboration among private and public representatives and financial aid experts in order to meet “just” and “equitable” standards? Do they not understand that public aid is already lavished upon public school students and that the Access Missouri grants constitute the only form of public aid available for low-income students attending private colleges? Would not equalization of AM grants then be tantamount to pandering to public college students at the expense of their deserving private school counterparts? Are taxpaying Missouri citizens choosing to attend private colleges less deserving of the taxpayer dime than those attending public colleges?

Second, they argue that private school students should not receive a higher subsidy because they chose a more expensive education. It is an inefficient use of government funds to confer grants to students who are simply “paying too much” for education that they could receive at a public institution at a much lower cost. Here, too, problems abound. First, this claim once again ignores the state appropriations already going toward public institutions and the students who matriculate there. Second, the claim assumes that private and public schools have homogeneous curricula that can easily be compared. The reality is more complicated. Private colleges offer unique course and degree possibilities, with unique levels of quality and market value relative to public schools. In that light, the value of education at a private college is private and subjective. Even if we were to assume that private and public colleges are perfect substitutes, it is unclear why Missouri should, other things being equal, choose to subsidize one group of students at the expense of another group.

Third, proponents suggest that reform would open access to more students. Some legislators have argued that equalizing the award amounts would result in an increase in the total matriculation of Missouri students. Given a dearth of quality data on the impact of Access Missouri, this claim is utterly unsubstantiated; without appropriate data, I find it very difficult to accept prima facie. To begin, the reform package reduces the maximum amount of private aid by $1,750 and increases the maximum amount of public aid by $750. All else equal, it is reasonable to assume that students would be less motivated to attend private colleges, but not significantly more motivated to attend public universities. Of course, all else would not be equal, and the sum effect of reform is difficult to project. What can be said is that the claim that access would increase as a result of the reform is premature.

The Post-Dispatch doesn’t seem to like the reform package, and instead suggests that schools compete for funds. As per this view, students would receive aid relative to the “effectiveness” of the institution they attend. It is an interesting idea, primarily because it would involve the development of outcome measures that higher education currently lacks.

I have a better idea, one on which I have previously written: Support students through higher education vouchers, and then use Access Missouri for the rest.

The post Access Missouri Debate Is Silly appeared first on Show-Me Institute.

Here’s a good bit:

Dr. Baumol and a colleague, William G. Bowen, described the cost disease in a 1966 book on the economics of the performing arts. Their point was that some sectors of the economy are burdened by an inexorable rise in labor costs because they tend not to benefit from increased efficiency. As an example, they used a Mozart string quintet composed in 1787: 223 years later, it still requires five musicians and the same amount of time to play.

Despite all sorts of technological advances, health care, like the performing arts, suffers from the cost disease. So do other public services like education, police work and garbage collection. While some industries enjoy sharp increases in productivity (cars can be built faster than ever, retail inventory can be managed better), endeavors like health care are as labor-intensive as ever.

Here’s another:

At the same time, demand for health care never lets up. So while slow sales of video games or clothing can reduce prices, health care prices never ease. And while the robots that help build cars have replaced human beings on the assembly line, robots that help out in modern operating rooms are not as economically efficient.

“We do now have robots performing surgery, but the robot is under constant supervision of the surgeon during the process,” Dr. Baumol said. “You haven’t saved labor. You have done other good things, but it isn’t a way of cheapening the process.”

It’s important to note, then, that the most effective ways to cut cost inflation given Baumol’s insight is through market-based means: shock the supply or rein in demand in the market. The current health care proposals passed by the United States Senate and House of Representatives do the opposite. As I’ve written before, both proposals would, by expanding coverage or insurance, impose an economic wedge between the price consumers pay and the price producers receive. When this wedge occurs, over-consumption of resources is all but guaranteed. So, effectively, the health care bills will increase demand and thus increase costs beyond the baseline level of inflation.

Fortunately, there are other options. The Show-Me Institute has written before about certain health care reform proposals, like health savings accounts (HSAs), that restrain demand without exacerbating the harmful effects of an economic wedge. Unfortunately, the House bill and especially the Senate bill attack HSAs and make them significantly less attractive.

The post Baumol and Health Care Costs appeared first on Show-Me Institute.

In Missourinet’s piece, Amy Blouin, executive director of the Missouri Budget Project, claimed:

“Childcare … that’s going to be taxed,” said Blouin. “Educational services, tutoring, private K-12 education if your kids are in a private school – a Catholic school – you’re going to pay this on those schools.”

Former Missouri Budget Director Jim Moody echoes Mrs. Blouin’s concerns and worries about the effects of the expansion of the tax base:

“That [includes] hospitals, doctors, everything in medical care,” said Moody. “So you’re going to tax, at 5.11 percent, things you’re not currently taxing – prescription drugs, medical care, hospital visits, nursing homes.”

They’re right. It’s true, all those goods and services will be taxed under the change, along with several others that have historically been exempt from taxation. Unfortunately, Blouin and Moody fail to appreciate that tax changes do not happen in a vacuum. This is a subtle point, but — as we have argued before — although the prices of these newly taxed goods would increase by the sales tax rate, several changes would simultaneously occur elsewhere in the economy to make consumers better off.

To begin with, its important to understand that a change in the tax code implies a change in incentives. People and firms alike respond to these changing incentives in many ways, including altering their supply and demand of goods and services. With that in mind, the claim that the prices on all goods and services would increase by the tax rate is misleading. In the long run, prices would increase at most by the tax rate, but this increase would be dampened by microeconomic changes.

Prices would indeed increase, but consumers would also become richer following the repeal of the income tax, and some of that reclaimed wealth would be used to protect against price increases stemming from the sales tax. Meanwhile, lower corporate and personal income taxes would create strong incentives for the inflow of people and investment funds to the state. In the long run, this translates to higher employment, higher incomes (which shield against price increases), and, ultimately, greater revenues from sales tax receipts.

In the process of presenting her case against the tax change to the state legislature, Blouin has suggested that 95 percent of Missourians would be hurt by HJR 56. It’s difficult to follow her reasoning. It is clear that 100 percent of Missourians would be affected by this policy change, but the claim that 95 percent would be hurt is unsubstantiated by the evidence. In the study I cowrote with Dr. Haslag, we presented a model that we used to compare tax burdens under both the current income tax rate and the proposed sales tax rate. We even used our own computation of the sales tax rate, 5.96 percent, which is higher than that suggested in the bill. We found that the break-even point was $60,000. At this income level, the burden under both tax systems was comparable. Because only 28 percent of Missouri tax filers in 2008 earned incomes higher than $60,000, the 95-percent figure that Blouin cites seems highly suspect. Hopefully, she will clarify her arguments and engage our own.

The post Addressing the FairTax Critics … Again appeared first on Show-Me Institute.

Using longitudinal elementary school teacher and student data, we document that students have larger test score gains when their teachers experience improvements in the observable characteristics of their colleagues. Using within-school and within-teacher variation, we further show that a teacher’s students have larger achievement gains in math and reading when she has more effective colleagues (based on estimated value-added from an out-of-sample pre-period). Spillovers are strongest for less-experienced teachers and persist over time, and historical peer quality explains away about twenty percent of the own-teacher effect, results that suggest peer learning.

The findings appeal to our intuitions about the labor market. In manual labor, when high-capacity workers develop new methods to make production more efficient, these “technologies” are soon replicated by the rest of the labor cohort to maximize efficiency. In education, the interaction between teachers allows the “technologies” of teachers with particularly effective techniques to diffuse to lower-quality teachers.

Peer effects have long been studied at the student level: Students appear to benefit from greater heterogeneity of skills in their cohort. For those of us interested in the economics of education, this novel research on peer effects for educators is exciting news. Usually, schools seeking to improve student performance at the margin will employ a cost-based approach that can include: reducing classroom size, increasing teacher pay, or increasing per-student spending and resources. This research provides the basis for a simple qualitative adjustment: school administrators should use the evidence to more carefully match teachers to their positions in order to exploit the full benefits of the heterogeneity of teacher quality.

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A simple policy change could help gifted students pay for college, use school resources more efficiently, shrink overcrowded classrooms, and allow teachers to focus on students who require extra attention, all while saving the state — and, thus, Missouri taxpayers — money. By offering students a portion of the state funds that would have been used to pay for their public school educations, Missouri would establish early graduation incentives for public high school students who are willing and able to complete the curriculum at an accelerated rate.

Missouri would not be wading into uncharted waters by establishing such a program; both Arizona and Texas have already implemented successful early graduation incentive programs to provide aid to their students. The Arizona program, known as the Early Graduation Scholarship Grant, disburses aid to graduates of Arizona public high schools, provided that students graduate at least one semester early and attend a postsecondary institution at least half-time. The amount of aid that a student receives in this program is contingent upon how early that student graduates, and the amount of courses that student takes upon graduating. A student who graduates a year early and enrolls full time at a postsecondary institution receives up to $1,250 during the first year of enrollment, and up to $750 during the second year. A full-time enrollee who graduates one semester early receives up to $1,000 during the first year of enrollment and up to $500 during the second year.

The Texas plan, the Early High School Graduation Scholarship, has elements similar to the Arizona plan but also encourages high school students to earn college credit. This plan stipulates that aid must be used at higher education institutions within the state of Texas. Per the plan, a student graduating high school in fewer than 36 months receives $2,000, with an additional $1,000 if that student has earned 15 hours of college credit prior to graduation. A student graduating after 36 to 41 months of high school receives $500, and an additional $1,000 for 30 college credit hours. A student graduating in no more than 41 months receives $1,000, provided that student has earned 30 college credit hours.

In Missouri, a policy that blended elements of the Arizona and Texas programs could produce a win-win-win-win situation for the state government, taxpayers, students, and schools. During 2006, the amount the state paid $3,250 per pupil to school districts. Suppose that Missouri develops a program granting $1,000 to any student graduating one year early. Also, suppose that 2,569 students participate in the program (the number that participated in the similar program in Arizona, a state containing roughly as many students as does Missouri). This would amount to an annual taxpayer savings of nearly $6 million.

Meanwhile, the student would enjoy a scholarship that pays for a substantial chunk of tuition at an in-state institution. As for school districts, although they would lose a portion of state revenue that would otherwise go to students who have graduated early, the largest slice of their revenue pie — taxes on local property values — would remain untouched. Schools and teachers would then be able to devote more time and money to students who need the most of both in order to be successful.

Often, we attempt to solve our problems in education through spending. Here, we have a tool that can both expand college access and increase per-student resources, all while saving money. That makes for sound policy, one that the state should seriously consider.

Abhi Sivasailam is an intern with the Show-Me Institute and an economics student at the University of Missouri–Columbia.

The post Offering Incentives for Early High School Graduation Would Save Taxpayer Money appeared first on Show-Me Institute.

In the realm of higher education funding, Missouri can do better than the system it currently has in place, which is currently characterized by little accountability for education funding, few effective measures of quality, and meager increases in access to the underserved, all while college tuition continues to rise. During the past few decades this system has sought to address problems in higher education related to access, affordability, and quality by lavishing an ever-increasing amount of funds and resources on higher education institutions within the state.

That this approach is failing to expand access or quality measures, or to reduce tuition costs, should be of little surprise. The ultimate question that those who fund higher education should address is not one of how much to fund, but how to fund.

In 2004, Colorado began an experiment in higher education funding when its legislature ratified Senate Bill 04-189 and created the College Opportunity Fund (COF), intending to end the traditional method of direct funding for universities. The new system called for students as young as 13 to sign up for the COF, with the hope that such early enrollment would force both parents and children to begin thinking about college financing options as soon as possible. When students enroll at a state college and authorize the state to disburse funds for their education costs, the state’s support is reported as a line item on their tuition bills.

University funding has never been very transparent; both the average taxpayer and the average student have little knowledge of how state money works to help students. As a result, the amount of taxpayer money that a given university receives for each student is somewhat arbitrary. Often, the per-student subsidy reflects the amount that the state can afford to spend, rather than the extent of student needs or costs.

Under the Colorado plan, the state’s contribution shows up in the tuition bill, so parents and students know the degree and change of state aid from year to year. This transparency helps students hold legislators accountable for their education spending, providing an additional incentive for the lawmakers who set education funding policy to keep student needs in mind.

Colorado also committed to direct funding for a portion of university expenses through fee-per-service contracts, and to conditional funding based on performance measures. In that system, a university is funded directly for progress toward broad state goals, such as increased graduation rates or expanded minority enrollment. This policy has helped some more than others, but unarguably has helped make college funding more effective and accountable. By introducing conditional funding, Colorado universities have begun striving to reach performance benchmarks, rather than just using tuition money to climb in national rankings through extravagant but ineffective spending.

Furthermore, by doing away with guaranteed funding, the state has created incentives for universities to keep operating costs and sticker prices low, in order to attract a larger pool of applicants. Three private universities are currently participating in the COF program, a competitive process of funding allocation that encourages all institutions to work toward greater efficiency by keeping programs that work and cutting costly ones that do not.

It is time for Missouri to take a critical look at higher education. Regardless of whether the state adopts the Colorado plan, lawmakers should look to lessons learned by other states and craft a system that encourages universities to compete and innovate in order to receive government funds. Taxpayers deserve a system that absorbs their dollars in the most efficient way. Students deserve an education that is accountable, affordable, and of the highest quality. Funding students instead of institutions would be a first step in the right direction.

Abhi Sivasailam is an intern with the Show-Me Institute and an economics student at the University of Missouri–Columbia.

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